Edison explains: Private credit demystified

What exactly is private credit?

Private credit is lending provided by non-bank institutions to businesses that cannot or choose not to borrow from traditional banks. Most borrowers are mid-sized companies generating between $10m and $150m of EBITDA annually, making them too large for conventional bank lending but too small to issue public bonds. The lenders are typically pension funds, insurance companies, credit funds and institutional asset managers, which negotiate directly with borrowers to structure customised loans. These loans usually carry higher interest rates and stricter terms than traditional bank financing, reflecting the additional work involved in structuring bespoke deals.

Why has private credit grown so rapidly?

Following the 2008–09 global financial crisis, banking regulations (notably Dodd-Frank Act in the US) made it significantly harder for traditional banks to serve this segment of the market. Credit provision has shifted markedly from banks to investors: in 2000, banks provided roughly 72% of loans to non-financial corporations, but by 2025 this had fallen to around 28%. The private credit market swelled from approximately $375bn in assets to over $1.7tn by 2023, with projections suggesting it could exceed $3.5tn by 2028. Major institutions including Blackstone, KKR and Apollo have poured hundreds of billions of dollars into the sector.

What are the potential benefits for investors?

Private credit offers several compelling characteristics. First, yields tend to be materially higher than public markets, with historical weighted average returns in the mid-teens compared to 6–7% for high-yield bonds. Second, default rates have historically been comparable to or lower than public high-yield markets. Third, loan durations tend to be shorter (often 12–18 months), reducing interest rate risk and providing flexibility. Fourth, because loans are not publicly traded, private credit exhibits lower apparent volatility and limited correlation with public markets. Finally, lenders can negotiate bespoke covenants and conduct comprehensive due diligence, potentially improving risk management.

What are the risks and drawbacks?

The most significant concern is liquidity: private credit investments are typically difficult or impossible to sell on secondary markets before maturity. There is also limited transparency compared to public markets, with less publicly available information about borrowers, making investors more reliant on manager due diligence. Deal structures can be complex, with bespoke covenants and terms that require careful analysis. The First Brands bankruptcy in late 2025 highlighted how even sophisticated institutional lenders can be caught out by hidden off-balance-sheet financing arrangements. Concentration risk is another factor, as minimum investments can be substantial. Additionally, as capital has flooded into the sector, competition for deals may be compressing returns and loosening lending standards.

Is private credit mostly sub-investment grade?

This is a common misconception. According to Apollo, of the roughly $40tn private credit addressable market, approximately $38tn (95%) is investment grade, while only around $2tn (5%) represents ‘levered lending’ (sub-investment grade). The investment-grade portion includes direct corporate lending, asset-backed finance, fund finance and infrastructure debt. It is the levered lending segment that attracts most of the media attention and concerns, but this represents a relatively small slice of the overall market. Private investment-grade credit often provides similar risk profiles to public investment grade bonds, but with enhanced yields due to the additional structuring work involved.

What lessons does First Brands offer?

The First Brands bankruptcy serves as a cautionary tale about the importance of transparency and due diligence in private credit. The auto parts supplier had borrowed nearly $6bn in private loans plus potentially $4bn more in off-balance-sheet working capital financing that creditors were apparently unaware of. Key lessons include: privacy can be a double-edged sword if it enables borrowers to obscure their true debt levels; as deals grow larger with multiple lenders participating, the supposed advantages of bilateral relationships diminish; and there is no magic in credit markets – if a lender earns above-average returns, much of the extra return likely comes from taking more risk rather than special skill.

How can individual investors access private credit?

While private credit was historically available only to institutional investors, individual investors now have several access routes. These include listed investment trusts and closed-end funds that invest in private credit, interval funds and tender-offer funds that provide semi-liquid exposure, business development companies (BDCs) listed on stock exchanges and specialist platforms for accredited investors. Each structure involves different trade-offs regarding liquidity, minimum investment, fees and diversification. Investors should carefully assess their liquidity needs and risk tolerance, and understand that manager selection is crucial given the opacity of underlying investments.

Edison Insight

Private credit has evolved from a niche alternative into a mainstream asset class. For investors, the key attraction is accessing higher yields with potentially better risk controls than public high-yield markets. However, the trade-off is limited liquidity, less transparency and reliance on manager skill. The recent First Brands bankruptcy illustrates both the risks of complex, opaque structures and the importance of thorough due diligence.